Chinese shares tumble 8.5 percent in biggest one-day drop since 2007

Chinese shares slid more than 8 percent on Monday as an unprecedented government rescue plan to prop up valuations ran out of steam, throwing Beijing's efforts to stave off a deeper crash into doubt.

Major indexes suffered their largest one-day drop since 2007, shattering three weeks of relative calm in China's volatile stock markets since Beijing unleashed a barrage of support measures to arrest a slump that started in mid-June.

"The lesson from China's last equity bubble is that, once sentiment has soured, policy interventions aimed at shoring up prices have only a short-lived effect," wrote Capital Economics analysts in a research note reacting to the slide.

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Chinese shares tumble 8.5 percent in biggest one-day drop since 2007

An investor walks past a screen that shows share prices in a security firm in Hangzhou, east China's Zhejiang province on July 27, 2015. China's benchmark Shanghai stock index slumped 5.22 percent in afternoon trade on July 27, dragged lower by worries over the economy. AFP PHOTO CHINA OUT (Photo credit should read STR/AFP/Getty Images)

A trader talks on the phone at the Hong Kong Stock Exchange on July 9, 2015. Hong Kong shares ended the morning session 3.43 percent higher July 9, rebounding from a recent plunge and tracking gains in China after Beijing beefed up measures to stop a mainland rout. AFP PHOTO / ISAAC LAWRENCE (Photo credit should read Isaac Lawrence/AFP/Getty Images)

An investor rests on his arm before a screen that shows share prices in a security firm in Hangzhou, east China's Zhejiang province on July 27, 2015. China's benchmark Shanghai stock index slumped 5.22 percent in afternoon trade on July 27, dragged lower by worries over the economy. AFP PHOTO CHINA OUT (Photo credit should read STR/AFP/Getty Images)

A screen that shows the Shanghai Composite Index (top) and the Shenzhen Component Index is seen on the side of an overpass in front of the Oriental Pearl Tower (back) in Shanghai on July 9, 2015. Chinese stocks stormed into positive territory in volatile trading on July 9 as Beijing launched new measures to halt a dramatic sell-off, but trading remained volatile in a crisis that has also hurt global share markets and commodity prices. AFP PHOTO CHINA OUT (Photo credit should read STR/AFP/Getty Images)

A man watches a board showing the graphs of stock prices at a brokerage office in Beijing, China, July 6, 2015. Chinese stocks rose on Monday after Beijing unleashed an unprecedented series of support measures over the weekend to stave off the prospect of a full-blown crash that was threatening to destabilise the world's second-biggest economy. REUTERS/Kim Kyung-Hoon

A man walks past an electronic board showing Japan's Nikkei average outside a brokerage in Tokyo, September 1, 2015. Japanese stocks crumbled on Tuesday, extending the previous day's losses after surveys showed China's factory sector shrank for the sixth straight month in August while investors remained on edge ahead of key U.S. data due throughout the week. REUTERS/Toru Hanai

A monitor displays the Hang Seng Index which reversed early losses during morning trading at a brokerage in Hong Kong, China August 25, 2015. China's major stock indexes slumped more than 6 percent to 8-month lows in early trade on Tuesday before paring losses, after a catastrophic Monday that destabilised financial markets around the world. REUTERS/Bobby Yip

Thai investors sit in front of an electronic board displaying live market data at a stock broker's office in central Bangkok, Thailand, August 24, 2015. Asian stocks slumped to 3-year lows on Monday as a slide in Chinese equities gathered pace, hastening an exodus from riskier assets as fears of a China-led global economic slowdown churned through markets. REUTERS/Athit Perawongmetha

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BACK TO SLIDE

The CSI300 index .CSI300 of the largest listed companies in Shanghai and Shenzhen tumbled 8.6 percent to 3,818.73 points, while the Shanghai Composite Index .SSEC lost 8.5 percent to 3,725.56 points.

China's market gyrations have stoked fears among global investors about the broader health of the world's second biggest economy, hitting prices of growth-sensitive commodities such as copper, which fell on Monday to not far from a 6-year low. [MET/L]

But, while the recent stock market weakness will have caught out many retail investors and companies who jumped in as stocks more than doubled in a year, the low rate of stock ownership by households and a disconnect between valuations and economic fundamentals mean the impact on the economy is likely to be less than in other markets.

FUTURES TUMBLE

Stocks fell across the board on Monday, with 2,247 companies falling, leaving only 77 gainers.

More than 1,500 shares listed in Shanghai and Shenzhen dived by their 10 percent daily limit, led by index heavyweights including China Unicom (600050.SS), Bank of Communications (601328.SS) and PetroChina (600028.SS).

All traded index futures contracts also fell by their maximum 10 percent limit, with the exception of a few tracking the large cap SSE50 index, which declined around 9 percent.

Some analysts said talk had circulated among traders that the China Securities Financial Corporation (CSFC) had returned ahead of schedule some of the loans it took to stabilize the stock market, highlighting investor concern that Beijing's commitment to supporting prices may be flagging.

The CSFC became the regulator's weapon of choice earlier this month, borrowing money from commercial banks to buy shares in Chinese stocks. That helped indexes jump around 20 percent from their recent low, until Monday's renewed decline.

The CSFC did not respond to calls requesting comment.

Monday's fall accelerated sharply in the afternoon, long after investors had digested lackluster data on profits at Chinese industrial firms and a disappointing private factory sector survey on Friday.

But Chinese stock investors have been celebrating bad economic news for months on the basis it would provoke more aggressive policy easing, seen as positive for stocks because it pushes cheap money into the market.

Some saw the government-induced recovery in share prices in recent weeks as itself contributing to the crash.

"In addition, investor confidence hasn't fully recovered. There has been no obvious increase in outstanding margin loans, while the amount of fresh capital inflows is much lower than the average level in May and June. With not enough money taking up the baton, a renewed, sharp correction is inevitable."

CONFIDENCE GAME

China's main stock indexes had more than doubled over the year to mid-June, when a sudden swoon saw shares lose more than 30 percent of their value in a matter of weeks.

Markets finally began stabilizing again in the second week of July, due mostly to Beijing's effort to pump liquidity into the market while barring investors from selling.

Beijing also cracked down on "malicious" short-sellers in the futures market, froze IPOs to prevent a liquidity drain and looked the other way as around 40 percent of companies suspended trading in their shares to escape the rout.

The campaign even acquired nationalistic tones at times, with local governments calling on retail investors to "defend the stock market," and domestic media and popular commentators expressing suspicions that the crash was engineered by a foreign cabal.